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More Negative Visibility to Product Recalls and One Supplier in Automotive Supply Chains

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In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would  expand and involve millions of affected motor vehicles and ensnarl many global brands.

That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.

Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators.  Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.

Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.

Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.

Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.

The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.

Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation.  However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles.  A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.

Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.

The passenger safety, financial, and brand risks are far higher.

Bob Ferrari


A Report Profiling Apple’s First Responder EFFA Program

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In the week that Apple staged its massive media event announcing two of its newest iPhone models, BloombergBusinessweek featured an intriguing article titled: Apple’s iPhone 6 First Responders. The report serves as a very timely reminder of the critical importance for harvesting product performance and service reliability information very early in the product launch stages.

The Apple program outlined is termed early field failure analysis (EFFA). The Bloomberg authors had a novel spin as to the purpose, one that may well resonate with our reader audience: “ As customers line up to buy the device (iPhone) around the world, Apple employees will show up at work to learn how they screwed up- and fix it.

Humor aside, the Apple program was conceived to resolve problems before they become far larger in-scope, when they are far more expensive to resolve across an outsourced supply chain. Bloomberg cites former Apple employee sources as indicating that EFFA testing is most stringent during the device’s first weeks of consumer sales, but can continue longer as problems arise. Therefore, the EFFA program for the iPhone 6 models is most likely underway as we pen this commentary. Once more, the report confirms that defective Apple devices returned at Apple retail outlets are directly airfreighted to Cupertino where the phone is physically examined and where manufacturing history can be traced to individual workers on an assembly line. There are some rather fascinating examples of how previous problems were found and resolved before they became a thorn.

The report is worthy of a read since it provides further evidence of the importance of connecting the service management business process with the product supply chain. It further provides evidence of how Apple’s product management and supply chain teams harness early feedback information related to specific products to avoid more costly issues and to protect the image of the brand. I suppose we could add that it also avoids the wrath of CEO Tim Cook when consumers feedback any displeasure in an Apple product.

Bob Ferrari

 


Another PTC Bold Move in Acquisition of Axeda to Ehance Internet of Things Technology Offerings

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In yet another reinforcement of the market potential and increased interest in the echnology support of the Internet of Things (IoT),  product and service lifecycle management technology provider PTC made another strategic investment to expand its product portfolio.

The company announced a definitive agreement to acquire privately held Axeda, an IoT cloud-based technology provider offering technology that connects machines and sensors to the cloud, for a reported $170 million in cash. According to an SEC filing, the merger agreement has been approved by the boards of both PTC and Axeda, and upon closing, Axeda will become a wholly-owned subsidiary of PTC. To finance this acquisition, PTC expects to borrow the full acquisition price.

The announcement follows the prior acquisition of IoT applications provider ThingWorx in December, which was the other strategic move into this new area of IoT and its relationships with both product and service lifecycle management.

Foxboro Massachusetts based Axeda is a privately-held company with majority ownership from JMI Equity which dominates its Board. The core of Axeda technology is the ability to establish secure cloud-based connectivity and management across a wide range of machines, sensors and devices. The Axeda IoT platform is described as a “complete M2M and IoT data integration and applications development platform” that includes connectivity, data management, and device and asset management support services. Axeda Connected Machine Management Applications provide support in the monitoring, remote access, content distribution, configuration and dashboard reporting of various M2M applications.

Support of business needs include technicians remotely diagnosing and servicing ATM’s, medical devices and industrial equipment. The company’s web site cites installed base customers in Industrial manufacturing such as Sealed Air and Tyco, high tech manufacturers such as EMC and NetApp, among others, and a fairly long listing of medical device manufacturers that include Medtronic, Phillips, Siemens and Waters. Strategic partners are AT&T, Microsoft, SAP, and WiPro, among others. In June of last year, WiPro invested an undisclosed amount in the company to secure premium partner access to technology resources along with the ability to test further and deploy M2M technology applications from the WiPro M2MCenter of Excellence in Bangalore.

Of further interest, Axeda CEO Todd DeSisto’s background is cited as “service as a senior executive for multiple venture and private equity companies with successful exits.”

According to PTC, the prime motivation for this acquisition was to complement the ThingWorx rapid application development environment by addressing customer needs for connectivity and security.  In the briefing with equity analysts, PTC management boasted about the current strong growth already encountered in ThinWorx related bookings which were described as the equivalent of $4 million in equivalent license revenues during the past quarter. President and CEO James Heppelmann described the Axeda acquisition as “the best deal we’ve done in a long time”.  He further noted that much of the current IoT interest for embarking on IoT initiatives is coming directly from C-level executives who are pondering the potential to reconfigure existing product value-chains.

Supply Chain Matters attended the recent PTC Live Global customer conference in June where many customer presentations addressed the IoT scenarios for connecting product and service management business process needs directly with information on physical devices. Our sense was that these new forms of applications are clearly in early stages of development yet attendees were drawn to some of the sessions, including those that addressed the linkage of machine sensing with service management processes.

PTC has made yet another bold move to lock-up a promising technology platform.  Supply Chain Matters reiterates our impressions communicated with the prior ThingWorx acquisition. namely that this move adds another arrow in PTC’s ongoing efforts to compete with far larger enterprise software vendors in supporting a rather broad and extensive product and service management product suite that has the potential to leverage the new era of digital based manufacturing.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.


Service Supply Chains Put to the Ultimate Stress Test in the Automotive Industry

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Across the United States, besides the U.S. team’s accomplishments in the World Cup competition, another dominant traditional and social media based news headline reflects of the incredible number of automobiles and trucks being subject to product recall. 

The primary story focuses on General Motors, which after intense scrutiny from U.S. regulators and legislators regarding faulty ignition switches among multiple models, is recalling all sorts of models that are believed to have been exposed to a component design problem, faulty ignition or otherwise. Thus far in 2014, GM has announced 44 product recalls involving nearly 18 million previously sold vehicles. Today’s social and business media buzz blares that the vehicles been recalled thus far is more than the total number sold in the U.S. in 2013. 

In a previous Supply Chain Matters commentary, we called attention to product recalls involving airbags supplied by Japan based Takata Corp. that were expected to expand and involve millions of affected vehicles. Today, both Honda and Nissan recalled close to an additional 3 million vehicles worldwide to repair the subject airbag problem, bringing the total number involved with the airbag defect to roughly 5 million vehicles.

An article syndicated by the Washington Post News Service features the headline: More than 1 in every 10 vehicles on the road has been recalled since January.  That articles notes that the defects range from rather serious (faulty ignition switches, overheating exhaust parts, power steering problems) to other problems where automakers are now highly sensitized to any potential liability problem. This article goes on to note that in the spirit of crisis bringing opportunity, that there may be an upside of this extraordinary situation: “ … meaning that dealers get to have their old customers back in the showroom.  There, they can show off the new models and, at minimum, be in a position to sell drivers on some repairs they previously were not considering.

This author, for one, was completely floored by the above statement.  Are you kidding me!  One in every ten vehicle owners being inconvenienced to have to make a service appointment and bring their vehicles for service, and dealers have the “blank” to try an upsell these consumers?

Beyond the lunacy of such statements, there is a parallel and very critical challenge about to happen.

Automotive service focused supply chains are going to be exercised to their biggest stress test, ever.  All of the subject recalled vehicles will require some form of a repair part, one that has hopefully, been correctly modified to remediate a suspected problem. The sheer numbers imply that some inventory will have to be re-allocated from those destined to support ongoing production schedules for newer vehicles. In some cases, necessary repair parts will not be able to meet overall demand, and dealers will have to be very careful in scheduling service appointments and setting customer expectations.  During Toyota’s past product recall crisis process involving unattended sudden acceleration, Toyota worked directly with its dealer network to coordinate extended service hours for consumers, including nights and weekends.  Coordinated round-the-clock efforts among certain component suppliers and respective dealers were directed at insuring repair parts were adequately distributed and vehicles were scheduled for repair based on availability of necessary parts.

In short, the folks that do necessarily receive all the hero badges, those directly supporting service focused supply chains will be called upon in the coming weeks to literally save brand focused reputations.

Last week, Supply Chain Matters was invited to attend the PTC Live Global 2014 customer conference held in Boston.  One of PTC’s product suites is technology focused on Service Lifecycle Management (SLM) which has been amassed from previous acquisitions of vendors such as Servigistics, MCA, Kaidera, Xelus and others. In one of the sessions, PTC executives noted that expectations have never been higher on the customer and business side of service management. Yet, service management tends to suffer from immature business processes, not from a lack of dedication and effort, but rather a lack of broader understanding to the importance of service management.  Mingling in the hallways and networking sessions, we once again had an immediate sense of how dedicated these people are, and also how unappreciated and frustrating their efforts can sometimes be.

Across automotive, the service focused supply chain will be put to its largest and most expansive stress test from the scope of sheer numbers of vehicles and information required to coordinate service scheduling needs.  Some will rise to the task at hand.  Some will not.

One fact is very clear- auto dealers are advised to take-off their sales hats and concentrate on service and customer satisfaction efforts, in all dimensions.  That includes a very close, almost intimate relationship with those dedicated professionals who plan, manage and fulfill service parts planning and order fulfillment. Forget for the time being, the algorithms and calculations related to mean time between part failures.  It is going to be “all hands on-deck” augmented by information coordination and supply chain intelligence that separates the best in class performers.

Stay tuned.

Bob Ferrari


PTC Acquires Internet of Things Platform Provider ThingWorx

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Prediction Nine of our Supply Chain Matters 2014 Predictions for Global Supply Chains declared that the Internet of Things would gain considerably more momentum in 2014 and beyond. We based that prediction on new investment initiatives from industrial giants such as General Electric to build-out the technology and service technologies to make more machines interact with one another.

Yet another reinforcement of this increased momentum was yesterday’s announcement from product and service lifecycle management software provider PTC indicating that it had acquired ThingWorx, a provider of platform that allows firms to build and run applications that leverage machine to machine information exchange.  The acquisition included a sum of $112 million in up-front cash along with a two year earnings agreement that could net ThingWorx an additional $18 million.  The transaction has already closed and PTC indicated in its briefing call with analysts that ThingWorx will continue to operate as a separately branded company with its existing senior management team providing both platform technology for customers while affording PTC the opportunity to leverage this technology within the provider’s existing PLM and SLM product suites. ThingWorx’s revenue model is subscription based predicated on the number of connected devices.

ThingWorx was founded in 2009 by three previous senior executives at manufacturing intelligence portal vendor Lighthammer, after that company was acquired by SAP AG. Their goal was build a manufacturing and services focused platform that would leverage concepts of connected intelligence to operational systems, involving people, systems and devices. While PTC executives admit that ThingWorx is not currently profitable, they were willing to pay a considerable premium by investing in a “momentum” company that could provide much broader internal and external opportunities. The company provides opportunities to leverage PTC’s current customer base of asset intensive design and manufacturing firms including its high profile within aerospace and defense focused firms.

PTC will begin selling ThingWorx this quarter and believes the company can add an additional $5m-$7m in incremental boost to PTC’s annual revenues. The company also outlined plans for internally leveraging the platform in development plans over the next three years.

Supply Chain Matters initial reaction is that PTC has made a bold move to lock-up a promising technology platform.  Of course, how PTC balances the needs to continue to fund ongoing development and selling efforts by ThingWorx and at the same time insure an open standards based development platform will be interesting to observe in the coming months. The move adds another arrow in PTC’s ongoing efforts to compete with far larger enterprise software vendors. In the longer-term horizon, successful internal integration efforts if timely, could present rather compelling service management options for asset-intensive or service intensive customers.

Bob Ferrari

 

 


New Paradigms of the Service Supply Chain within the Aerospace Industry

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Our readers are more than aware of the ongoing unique challenges facing the global supply chains involving the aerospace industry.  Airline and aircraft leasing customers demanding more cost-efficient and innovative aircraft, coupled with breakthroughs in the development of lighter composite materials have resulted in the current unprecedented backlog of customer orders for OEM’s such as Airbus and Boeing. These respective OEM’s continue to be challenged with large scale multi-year production ramp-up needs while continuing to deal with engineering and production challenges.

Supply chain teams within aerospace are also fully aware that long-term maintenance and the service supply chain can be far more profitable and provide more opportunities for sustaining revenues than the product focused supply chain.  Today’s more technology laden aircraft represent far larger potential capital expenditures for airlines and over the past few years, aerospace OEM’s and component providers have come-up with creative leasing, financing and ongoing maintenance plans that reduce up-front capital and long term operating cost burdens.

This especially concerns the far more fuel efficient engines that will power the next generation of aircraft.  Airbus was able to seize first mover market advantage and book over 800 aircraft orders in months because of its collaborative co-development efforts with Pratt & Whitney in the development of the geared turbofan Pure Power engine offered on the A3320neo aircraft. Consider the fact that each plane comes with at least two engines, and aircraft engine manufacturers are bursting with order backlogs.  Pratt has secured orders for upwards of 2900 engines while CFM International, the joint venture among General Electric and Snecma, whose Leap engine is offered as an option for the Boeing 787 Dreamliner, has amassed over 4100 orders.  Engine manufacturers are keen to provide customers with long-term leasing and “power by the hour” maintenance programs where both airline customers and engine providers have incentives to insure that their engines provide reliable, continuous service at a lower overall cost.

The long-term profitability stakes are so high that Rolls-Royce, the sole engine provider for Airbus’s A380 superliner and the upcoming A350 has been involved in a high visibility public dispute with Air France-KLM over that airline’s independence in providing long-term maintenance for itself and other airlines. The airline was keen to continue its in-house maintenance program, so much so, that it was willing to hold hostage for months, a pending $6 billion order for 25 new Airbus A350 passenger jets until its demands for in-house maintenance were met. A Financial Times article in late August noted that the Rolls “Total Care” maintenance activities had already yielded Rolls over €1.5 billion in revenues for the first half of 2012.

While the long-term rewards for a robust service supply chain are lucrative, the product lifecycle management, information and supply chain challenges for engine providers are complex and require innovative approaches.  Rolls Royce has already experienced initial learning with its Trent family of engines powering the massive A380.  A catastrophic engine failure in 2010 involving a Qantas Airlines A380 was ultimately traced to a manufacturing flaw involving the assembly of engine oil tubes that initiated oil leaks resulting in the in-air failure of the engine. Since that time, Rolls has responded to a number of safety and maintenance inspection mandates involving the oil distribution systems of the Trent.

The General Electric GEnx engine is a powered option for the 787 Dreamliner. This new engine utilizes the latest generation materials and design processes to reduce weight, improve performance and lower maintenance. The rear turbine blades section is described by GE as featuring: “unique powdered metal rotors, specialized coatings, enhancing cooling techniques and new blade materials.” In late July, a brand new 787 scheduled for delivery to Air India experienced an inflight engine failure during final testing and the engine had to be returned for teardown analysis. During the same period, ANA (All Nippon Airways) had to temporarily ground part of its operating 787 fleet after unusual corrosion was found in the gearbox components of a Rolls Royce Trent 1000 engine. ANA, the original launch customer for the 787, indicated that the action stemmed from a flawed process that could leave a certain parts of the Trent 1000 engines vulnerable to early corrosion.

The sophisticated engines being introduced by aircraft engine manufacturers are breaking new ground in technological capability. They are akin to the breakthrough introduction of direct fuel injection systems over carburetors in automobiles so many years ago. Over time, engine manufacturers will eventually reach stated goals for performance, long-term reliability and uptime.  But as this occurs, the paradigm of the service supply chain shifts towards early warning predictability maximized uptime and needs for precise synchronization of service events. This includes on-board and self-communicating diagnostics providing early warning to operating issues, more responsive networks of service parts and service depot suppliers as well as highly networked maintenance facilities.

In our view, aerospace manufacturers need to consider increased investments in their service supply chain capabilities including deeper product lifecycle management integration and supply chain intelligence, collaborative execution and supply chain control tower concepts.

The service supply chain will no longer take a back seat to the product-driven supply chain, and for aerospace specifically, it will be instrumental in fulfilling long-term revenue and profitability business objectives.

Bob Ferrari

 


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